Thursday, February 26, 2009

The Loan Modification Corruption Begins

After reading an article in Monday's Chronicle indicating that many people holding the pricy mortgages common to the Bay Area would not be able to take advantage of low-cost refinances, Rep. Jackie Speier, D-Hillsborough, amended a bill scheduled for a House vote.

"After reading your article, I thought, this isn't going to work for California," Speier said."I've drafted an amendment so that rather than being limited to whether the loan was conforming at time of origination, it will be based on (whether it's conforming at) the time of (modification), which will take the limit up to $729,750 in high-cost areas. This should make more people in the Bay Area eligible."

Speier's amendment addresses an aspect of the plan that encourages mortgage services to modify loans to make them more affordable for struggling borrowers. The modifications are supposed to reduce monthly payments to 31 percent of a borrower's income for five years; they also could include lowering the principal or refinancing the loan.

The amendment says that loan modifications must be available to loans that are "conforming," meaning those that can be securitized or guaranteed by Freddie Mac or Fannie Mae. The conforming loan limit was $417,000 until July 1, 2007. About 60 percent of homes purchased in the expensive Bay Area in 2005 and 2006 were bought with higher-cost "jumbo" loans above $417,000; about 30 percent of homes in California were jumbos in those years, according to MDA DataQuick. The limit is now $729,750 in high-cost regions, including most of the Bay Area.

I will put this in perspective. President Obama wants his mortgage bailout plan to stop at any loan amount no more than $417,000. That's because that is the limit on Fannie/Freddie loans. In many ritzy areas like San Francisco, New York, and Los Angeles, such loan amount limits would price out many folks that are in trouble. That sprung Rep. Jackie Speier, D-Hillsborough, into action. She has added an addendum to allow "high cost" areas to allow loan limits as high as $729,750.

The first problem is this. If this amendment passes, then the tab on this bailout is no longer $275 billion but something much higher. Second of all, if Fannie/Freddie is forced to take on hundreds of thousands of higher loan amounts, that increases the risk to both those entities. There is a reason why Fannie/Freddie set loan limits. The main reason is so their portfolios aren't overweighted with a few large loans. If hundreds of thousands of loans at $600,000 and more suddenly wind up in their portfolios, the adverse risk of default on those loans is greater than on loans of $100,000, $200,000, and $300,000.

The second problem is that it is even harder to justify that only those that "played by the rules" are helped when loan modifications are done on loans as high as $729,000. Are we really to believe that these folks were merely trying to live the American dream, or maybe, they were living up the American dream? If someone is having trouble affording their McMansion, is it really the government's responsibility to give them a loan they can afford?

There is another larger point that is relevant to the overall arc of this mortgage bailout. Rep. Speier is one rep in one community. She saw an opportunity and now is adding an addendum so that her constituents are covered by this bailout. How long before others get into the same act and try and add addendums that covers their contituency. A mortgage bailou is a boondoggle. As such, either Speier's constituency is paying or receiving. She wouldn't be a good rep if she didn't make sure her constituents aren't receiving. No legislator would be. As such, watch for many more such amendments as other legislators attempt to make sure that their constituency is covered under the mortgage bailout. As such, watch for the price tag to go up exponentially.

8 comments:

Anonymous
said...

Conforming loan limits were changed to a regional definition a little more than a year ago, to account for different costs of housing stock in different areas. For example, while $300,000 would buy a palace in many places of the country, in San Francisco / Boston / Seattle / New York / etc this wouldn't even buy a tiny condo due to the market conditions.

Thus people trying to purchase or refinance homes in high-cost-of-living areas were unable to get reasonable rates, instead having to pay the jumbo rates.

The provision is not changing the definition of conforming, just changing it to use conforming as of now, not at the time of loan origination.

That may all be so, however loan modifications have no limits. They are a new tool on any mass scale. I personally think their limit should be zero since they are a horrible idea. The President set them at $417k. Now, this congress person wants to set them to $729k in some areas, and not coincidentally hers would be one.

This amendment has nothing to do with Conforming limits on loans. This amendment has everything to do with slowly increasing the size and scope of government subsidized loan modifications so that just about everyone will get one.

The people that will get these loan mods will overwhelmingly be those that got a Jumbo loan. They would have gotten a loan before the limits were raised. Now, the government will be bailing them out regardless.

If you think it is the government's role to bailout someone that bought a property with a loan amount of as much as $729k, we have a very different philosophy on the role of government.

Anonymous said: "Thus people trying to purchase or refinance homes in high-cost-of-living areas were unable to get reasonable rates, instead having to pay the jumbo rates."

I would assume that these people knew they were going to have to pay the "jumbo rates" when they signed for the loan. If the "jumbo rates" weren't reasonable, why would they take on the loan? Did they expect the government would come to their rescue at some later time? Must have.

People used to have to live by their bad decisions. Now, we have learned we don't have to. So, let's all live irresponsibly. It doesn't cost us anything. Right?

It's a part of much bigger problem Lonzo. There was nothing "unreasonable" about Jumbo rates. It is more risky for the bank to lend that much money and so the rate reflects it. There is a growing mentality led by the President that pricing rules for mortgages be demonized and dismissed.

President Obama wants those that have mortgages that are above 80% of the value to get rates as though they are below. Of course, there is a simple reason why they don't get those rates. Their own mortgages are more risky. Yet, President Obama bemoans the family that can't save money because they don't qualify. Of course, THEY ACTUALLY DON'T QUALIFY. Loans do have rules and one of the reasons we are in this mess is because we had too few of them. Now, it appears, that some want all rules ignored so that everyone can get a good deal. Isn't that how we got here?

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